Changes to some of the MNB’s monetary policy instrumentsPrint
1. Credit institutions may choose one of four reserve ratios set by the Bank
Following the decision by the Monetary Council on 6 September 2010, all credit institutions subject to reserve requirements will be free to decide whether they want to satisfy their reserve requirements at the current 2% or a higher reserve ratio. Beginning with the November 2010 maintenance period, credit institutions subject to reserve requirements may choose a 2%, 3%, 4% or 5% reserve ratio; and they may alter their choice of the reserve ratio six monthly, in April and October. Required reserves will be equal to the product of the reserve base and the chosen reserve ratio, i.e. the method of calculating reserves will remain unchanged. It is expected that the optional reserve ratio will contribute to improving the efficiency of the reserve requirement system, and will give credit institutions much greater flexibility in their liquidity management and enhance the stability of the interbank forint market.
This change has been made necessary by the impaired functioning of interbank markets since the onset of the financial crisis; however, the MNB, consistent with its strategy, will strive to bring its reserve requirement framework into harmony with that of the euro area over the long term.
The objective of the Magyar Nemzeti Bank’s reserve requirement framework based on averaging of required reserves remunerated at market interest rates (equal to the central bank base rate) is to support liquidity management of domestic banks and thereby to smooth out fluctuations in interbank money market interest rates. Consequently, by operating the monthly reserve averaging scheme, the Bank’s aim is to ensure the efficiency of the interest rate transmission mechanism, as credit institutions will have the ability to manage part of liquidity shocks affecting them through day-to-day and intraday fluctuations in amounts held as required reserves on their accounts at the Bank.
The financial crisis, which began in 2008, has led to a significant realignment in domestic interbank markets. The efficiency with which banks redistribute liquidity among themselves is much lower than before the crisis. Based on past experience, the optimal ratio of required reserves to the reserve base (i.e. the optimal reserve ratio) shows significant differences across individual credit institutions from a liquidity management perspective. Those Hungarian banks that are affected by small liquidity shocks relative to the size of their reserve base are able to manage their liquidity adequately at the 2% reserve ratio applied currently. Those banks, however, that are hit by relatively greater liquidity shocks, are unable to efficiently exploit the averaging mechanism of the required reserve system at the 2% reserve ratio. By introducing higher optional reserve ratios, the Bank intends to manage this current asymmetry and ensure that in the future the reserve requirement system will help all domestic credit institutions manage their liquidity in an efficient way.
The Bank conducts its monetary policy based on inflation targeting using its monetary policy tools designed to influence short and long-term interest rates in financial markets. Its liquidity-providing and liquidity-absorbing operations, available for use by credit institutions, ensure that market interest rates are maintained in line with the official interest rate. Hungarian banks with significant system-level surplus liquidity may place their liquidity in two-week MNB bills with the Bank at their discretion. This, however, has no bearing on their lending activity. Consequently, by reducing or increasing their holdings of two-week bills, domestic banks will be able to manage their demand for liquidity or excess liquidity arising as a result of an increase or decline in required reserves. At the same time, they will incur no loss of interest, as the MNB remunerates both banks’ required reserves and excess liquidity placed with it in two-week bills at market interest rates (i.e. at the base rate). Consequently, the required reserve ratio, as well as the size of required reserves defined using the ratio, will not influence either the stance of monetary policy or the lending activities of domestic banks.
13/2010. MNB Decree on the reserve ratio is available from the link below:
2. Publication of forecasts of the banking sector’s need for liquidity
Form 14 September 2010, the Bank will publish its forecasts of the factors affecting the banking sector’s liquidity need, for a trial period of six months. The aim of the forecasts is to facilitate the optimal recourse to the Bank’s main policy instrument through supporting credit institutions’ liquidity management and to ensure that credit institutions rely increasingly less on the overnight standing lending and deposit facilities. As a consequence, overnight interbank rates will move more in line with the official interest rate. Each week (currently on Tuesdays), prior to the auctions of two-week bills, its main policy instrument, the Bank will publish the expected average effect of factors influencing forint liquidity.
Movements in the Treasury account and cash in circulation influence the liquidity of the banking sector as a whole. However, counterparties should be aware of the fact that, due primarily to the difficulty of forecasting the balance on the Treasury account, the Bank is able to estimate the expected size of the banking sector’s liquidity only with considerable uncertainty. Therefore, the Bank does not assume any responsibility for the accuracy of forecasts, and it will neither publish nor comment on any deviation of the forecasts from actual liquidity subsequently. Nevertheless, it is judged that publications of the forecasts may provide benefits to market participants. A decision on the finalisation of the publication will be made based on the experiences of the trial period and feedback from market participants, in spring 2011.
Forecasts of the changes in the banking sector’s liquidity will be made available on the Bank’s website under ‘Monetary policy instruments’ and on Reuters (page NBHL) and Bloomberg (page NBH4).
The aim of the announced changes is to help credit institutions in managing their liquidity positions in order to ensure that i) the central bank base rate, signalling the stance of monetary policy, better guides financial markets and ii) domestic financial institutions perform their intermediary role smoothly. Participants will be kept continuously informed about the conditions of use of, and actual recourse to, the Bank’s monetary policy instruments on the Bank’s website and news agencies’ wire service pages.
Magyar Nemzeti Bank